Category Archives: HSA mechanics

HSA Expenses Incurred Before Opening Account

Opening an HSA

The timing of opening your Health Savings Account –going to a bank and actually creating an account in your name– ends up being quite important for your finances. The reason is the date you open your Health Savings Account is the date that qualified medical expenses begin for you. Any medical care incurred before you open your HSA does not count as a qualified medical expense. Said another way, you cannot use pre-tax dollars to purchase medical care that occurred before you actually created your Health Savings Account. Per IRS Form 969:

For HSA purposes, expenses incurred before you establish your HSA aren’t qualified medical expenses. State law determines when an HSA is established.

It is actually easier than most people think to open up a Health Savings Account. The main difficulty comes in choosing a provider. Things I look for are low fees, online banking ability, phone app, and investment options. Once you find the financial institution you wish to bank with, you need to apply for the account. While this sounds painful, it is actually quite simple. To open the HSA, they will need standard information such as name and address, and also some information about your health insurance. They will use this to validate that you do in fact have an HDHP, and also use your self-only or family coverage for a rough determination of your contribution limit for the year. They use that information to help prevent contribution mistakes and it aides in generating Form 5498-SA and Form 1099-SA. Once you submit that, you are all set, and you can begin making contributions to your HSA.

The cost of not opening an HSA

You must overcome the tendency to delay opening your HSA, as it could come back to bite you. If you have HSA eligible insurance but have not yet opened a Health Savings Account you may be on borrowed time, as any medical expense incurred cannot be paid with pretax dollars. The risk to you can be equal to the (amount of expense) x (your tax rate). Even a $100 expense for someone in a 25% tax bracket will end up costing them $33 extra. Said another way, it takes $133 dollars taxed at 25% to pay for a $100 medical expense. For an HSA holder, they only need to earn $100 to pay for the expense. Multiply this expense by 10 and this $1,000 expense will cost you $333 in extra tax dollars paid, all of which is completely avoidable. This money adds up and there is no reason to pay it with the generous HSA contribution limits.

Effect on Contribution Limit

While opening the actual Health Savings Account begins the process of allowing qualified medical expenses, it does not have an effect on your contribution limit for the year. Your contribution limit is based on when you are an eligible individual. So you can have HSA eligible insurance and be allowed to contribute to your not-yet-open HSA. Of course, you will need to open that Health Savings Account before you make that year’s contribution.

Take the following scenarios as an example:

HSA coverage begins HSA opened QME begin Contribution Limit Last Month Rule?
January 1st June 1st June 1st Full N/A
January 1st January 1st January 1st Full N/A
June 1st June 1st June 1st 1/2 up to full Optional
June 1st October 1st October 1st 1/2 up to full Optional

As you can see above, delaying in opening your HSA can prevent you from paying for medical care from your HSA. If you plan on contributing to an HSA you might as well open the account as soon as possible, to take advantage of paying for medical care tax free with the HSA.

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2018 IRS HSA Contribution Limits

The inflation forecasters at the IRS have done it again and released the 2018 Health Savings Account definitions and contributions limits. Surprisingly, this is a pretty good year for HSA savers in terms of increases to contribution limits, but HDHP definitions have tightened a little which might exclude some health insurance plans. You can see the full document released by the IRS here as IRS Rev. Proc. 2017-37 (PDF).

For 2018 the IRS has increased the amount you can contribute to HSA’s with both Self-Only and Family coverage. However, they have also increased what qualifies as an HDHP by raising the Minimum Deductible.

2018 HSA Contribution Limits

If you have an HDHP and have opened a Health Savings Account, below are the contribution limits for self-only and family coverage for 2018.

2015 2016 2017 2018
Self-Only HSA Contribution Limit $3,350 $3,350 $3,400 $3,450
Family HSA Contribution Limit $6,650 $6,750 $6,750 $6,900
55+ Additional Contribution Limit +$1,000 +$1,000 +$1,000 +$1,000

As you can see, self-only HSA’s have the contribution limit increased by $50 for 2018. In addition, the family HSA contribution limit has increased by $150 over 2017, which may be a record increase. These are important as this governs the deduction your HSA allows, allowing you to save more in taxes. It is interesting that both self-only and family contribution limits increased in 2018. For the past few years, only one would increase while the other stayed constant, and the pattern would reverse the following year. But perhaps something has changed as both receive an increase in 2018. Not surprisingly, the age 55+ catch up contribution remains flat at an additional $1,000.

2018 HDHP Limits

Below are the 2018 HDHP deductible limits as well as out of pocket maximums that determine whether or not your plan is an High Deductible Health Plan, and thus, whether or not you can contribute to a Health Savings Account.

2015 2016 2017 2018
Self-Only Min Deductible $1,300 $1,300 $1,300 $1,350
Self-Only OOP Max $6,450 $6,550 $6,550 $6,650
Family Min Deductible $2,600 $2,600 $2,600 $2,700
Family OOP max $12,900 $13,100 $13,100 $13,300

2018 sees both the self-only and family minimum deductible tick up by $50 and $100, respectively. This is a negative for HSA’s as the higher required deductible reduces the number of insurance plans that qualify for HSA’s, with some Obamacare plans falling just below this threshold. Offsetting this somewhat is a family out of pocket maximum increases $200 to $13,300, which is positive as this higher maximum includes more health insurance plans as HDHP’s. However, the minimum deductible is weighted more heavily and thus a net negative as more plans are weeded out due to a deductible on the margin than hitting up against the out of pocket maximum.

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